The Russell 2000 Index is one of the most popular benchmarks for tracking the performance of small-cap U.S. stocks. For investors seeking growth combined with income, investing in Russell 2000 index funds that pay dividends offers an attractive strategy. This article explores the best dividend-paying Russell 2000 funds, how they work, and why they can be a valuable part of your portfolio.
What is the Russell 2000 Index?
The Russell 2000 Index is a stock market index that measures the performance of approximately 2,000 small-cap companies in the United States. It is a subset of the broader Russell 3000 Index and is often used as a benchmark for small-cap stock performance.
- Covers companies with market capitalizations roughly between $300 million and $2 billion
- Represents about 10% of the total U.S. stock market by capitalization
- Offers high growth potential but also tends to have higher volatility than large-cap indexes like the S&P 500]
Why Invest in Russell 2000 Index Funds?
Index funds that track the Russell 2000 provide investors with diversified exposure to the small-cap segment of the market. Key benefits include:
- Diversification: Spreads risk across 2,000 stocks rather than betting on single companies
- Growth Potential: Small-cap stocks often grow faster than large caps over time
- Lower Costs: Index funds typically have low expense ratios compared to actively managed funds
- Dividend Income: Many Russell 2000 companies pay dividends, providing income alongside capital appreciation
Understanding Dividends in Russell 2000 Index Funds
Dividends are cash payments made by companies to their shareholders, usually from profits. While small-cap companies tend to reinvest earnings for growth, many Russell 2000 stocks still pay dividends.
Dividend-paying Russell 2000 index funds collect these dividends from their holdings and distribute them to fund investors, usually on a quarterly basis. This provides an additional income stream, which can be reinvested or taken as cash.
Top Russell 2000 Index Funds with Dividends in 2025
Here are some of the best Russell 2000 index funds that offer dividend income:
| Fund Name | Ticker | Expense Ratio | Dividend Yield | Minimum Investment | Fund Type |
|---|---|---|---|---|---|
| iShares Russell 2000 ETF | IWM | 0.19% | 1.10% | No minimum | ETF |
| Vanguard Russell 2000 ETF | VTWO | 0.10% | 1.12% | No minimum | ETF |
| Schwab U.S. Small-Cap ETF | SCHA | 0.04% | 1.00% | No minimum | ETF |
| SPDR Russell 2000 ETF | TWOK | 0.12% | 1.05% | No minimum | ETF |
| Fidelity Small Cap Index Fund | FSSNX | 0.025% | 1.15% | $0 (no minimum) | Mutual Fund |
How Dividend Yields Compare Among Russell 2000 Funds
While dividend yields on small-cap funds tend to be lower than those of large-cap dividend funds, many Russell 2000 funds still offer attractive yields compared to the overall market.
| Fund | Dividend Yield (as of 2025) | 5-Year Average Yield |
|---|---|---|
| IWM | 1.10% | 1.05% |
| VTWO | 1.12% | 1.07% |
| SCHA | 1.00% | 0.95% |
| TWOK | 1.05% | 1.00% |
| FSSNX | 1.15% | 1.10% |
Benefits of Dividend Reinvestment
Most Russell 2000 index funds offer dividend reinvestment plans (DRIPs), allowing investors to automatically use dividends to purchase more shares of the fund. This helps compound returns over time.
- Compounding Growth: Reinvested dividends generate more dividends in future periods.
- Dollar-Cost Averaging: Regular reinvestment helps smooth out purchase prices over time.
- No Additional Fees: Many funds allow DRIP participation without extra costs.
How to Choose the Best Russell 2000 Dividend Fund for You
Consider the following factors when selecting a Russell 2000 dividend fund:
| Factor | What to Look For |
|---|---|
| Expense Ratio | Lower is better for long-term growth |
| Dividend Yield | Higher yields provide more income |
| Fund Size | Larger funds tend to be more stable |
| Tracking Accuracy | How closely the fund tracks the index |
| Liquidity | Important if investing in ETFs |
| Minimum Investment | Consider your available capital |
Risks of Investing in Russell 2000 Index Funds
Investing in small-cap stocks carries certain risks:
- Volatility: Small-cap stocks often fluctuate more than large-cap stocks.
- Liquidity Risk: Some small-cap stocks may be thinly traded.
- Economic Sensitivity: Small companies may be more affected by economic downturns.
- Dividend Variability: Dividends can fluctuate with company earnings.
Tax Implications of Dividend Income
Dividends from Russell 2000 index funds are typically taxable in the year they are received, unless held in tax-advantaged accounts like IRAs or 401(k)s.
- Qualified Dividends: Often taxed at a lower rate than ordinary income.
- Non-Qualified Dividends: Taxed at the investor’s regular income tax rate.
- Dividend Reinvestment: Reinvested dividends are still taxable as income.
Consult a tax advisor to understand the specific implications based on your situation.
How to Invest in Russell 2000 Index Funds with Dividends
- Open a Brokerage Account: Most brokers offer access to ETFs and mutual funds tracking the Russell 2000.
- Research Funds: Use fund screener tools to compare yield, expenses, and performance.
- Decide on Investment Amount: Consider your portfolio diversification and risk tolerance.
- Place an Order: For ETFs, buy shares like stocks; for mutual funds, invest at the next available NAV price.
- Set Up Dividend Reinvestment: Opt for DRIP to automatically reinvest dividends.
Performance Snapshot: Russell 2000 vs. S&P 500
| Year | Russell 2000 Return (%) | S&P 500 Return (%) |
|---|---|---|
| 2022 | -11.0 | -18.1 |
| 2023 | 14.2 | 16.0 |
| 2024 | 10.5 | 8.7 |
| 2025* | 7.8 (YTD) | 9.2 (YTD) |
*YTD = Year To Date as of mid-2025.
While the Russell 2000 can outperform the S&P 500 during growth phases, it tends to be more volatile during downturns.
Conclusion
Russell 2000 index funds with dividends offer a compelling mix of growth potential and income, especially for investors looking to diversify into small-cap stocks. Whether you choose ETFs like iShares Russell 2000 ETF (IWM) or mutual funds like Fidelity Small Cap Index Fund (FSSNX), these funds provide broad market exposure with the added benefit of dividend payouts.
Keep in mind that small-cap investing involves volatility and risk, so aligning your choice with your investment goals and risk toleranc
